Retirement planning often includes the goal of eliminating mortgage payments before leaving the workforce behind. This strategy is predicated on the notion that cutting costs and doing away with a mortgage while living on a fixed income makes it simpler to make ends meet in retirement.
However, is paying off your mortgage the best course of action always? Some experts argue that there might be drawbacks to devoting a substantial amount of your finances to repaying a home loan. Furthermore, keeping a mortgage into retirement may have advantages, such as the ability to deduct interest payments from your yearly taxes.
Still, this may not be the best move for everyone. Your mortgage interest rate, your projected retirement income, and the amount of liquidity you’ll give up to pay off your mortgage are the three most crucial considerations.
What Happens If You Still Have a Mortgage When You Retire?
Retirement is a time to relax and enjoy the fruits of your labor. But for many people, it’s also a time of financial uncertainty. One of the biggest concerns for retirees is whether they can afford to keep their home.
If you still have a mortgage when you retire, you’ll need to factor in your monthly payments into your retirement budget. This can be a significant expense especially if you’re on a fixed income.
There are a few things you can do to make sure you can afford your mortgage in retirement:
- Pay off your mortgage before you retire. This is the best way to ensure that you won’t have to worry about making monthly payments. However, it’s not always possible to do this, especially if you’re nearing retirement age.
- Downsize your home. If your current home is too big and expensive, you may want to consider downsizing to a smaller, more affordable home. This will free up some money that you can use to pay off your mortgage or invest for retirement.
- Get a reverse mortgage. A reverse mortgage allows you to borrow against the equity in your home without having to make monthly payments. This can be a good option for retirees who need extra cash to cover their expenses.
Pros and Cons of Having a Mortgage in Retirement
There are both pros and cons to having a mortgage in retirement
Pros:
- You can stay in your home. If you love your home and don’t want to move, having a mortgage can allow you to do that.
- You can build equity. As you pay down your mortgage, you’ll build equity in your home. This can be a valuable asset that you can use to supplement your retirement income.
- You may be able to get a tax deduction. If you itemize your deductions on your taxes, you may be able to deduct the interest you pay on your mortgage.
Cons:
- You’ll have to make monthly payments. This can be a significant expense, especially if you’re on a fixed income.
- You may not be able to afford to pay for other expenses. If you’re struggling to make your mortgage payments, you may not be able to afford to pay for other expenses, such as healthcare or travel.
- You could lose your home. If you can’t make your mortgage payments, you could lose your home.
The Bottom Line
It is up to you to decide whether or not you should have a mortgage when you retire. There are both pros and cons to consider. It’s crucial to see a financial advisor if you plan to retire with a mortgage in order to ensure that you can afford it.
Additional Resources
- U.S. Bank: Mortgages after retirement: Here’s what to know
- Fortune: Should you have a mortgage in retirement? Pros and cons
Frequently Asked Questions
Q: What happens if I can’t afford my mortgage in retirement?
A: You have a few options if you can’t afford your mortgage when you’re retired. You have three options: get a reverse mortgage, downsize to a smaller house, or try to sell your house. You can also talk to your lender about modifying your loan terms.
Q: What is a reverse mortgage?
A: A reverse mortgage is a loan that allows you to borrow against the equity in your home without having to make monthly payments. The loan is repaid when you sell your home or when you die.
Q: How can I make sure I can afford my mortgage in retirement?
A: There are a few things you can do to make sure you can afford your mortgage in retirement. You can pay off your mortgage before you retire, downsize your home, or get a reverse mortgage. You can also talk to a financial advisor to make sure you can afford it.
When it might not be make sense to carry a mortgage into retirement
Being mortgage-free in time for retirement is increasingly becoming unheard of for retirees. According to TIAA, the oldest group of baby boomers—those born between 1946 and 1951—have a much lower likelihood of having paid off their mortgage before retiring. And in some cases, that may be a deliberate decision.
About 30% of TIAA clients in retirement or within one year of retirement continue to maintain a mortgage.
“There are benefits and drawbacks to having a mortgage in retirement, even though many retirees aim to have as little debt as possible during their golden years,” says Jarrod Fowler, head of TIAA’s investment and advisory center.
There are a number of situations where making rapid mortgage payments might not be the best financial choice.
The mortgage interest tax deduction might be less valuable if it’s your only one
Another thing to think about when determining if carrying a mortgage is a good option for you is the total amount of deductions you’re itemizing on annual tax returns.
The Tax Cuts and Jobs Act of 2017 made itemizing deductions on tax returns more challenging. The standard deduction now sits at $25,900 for married individuals and $12,950 for single filers, making qualifying for itemization difficult. Paying mortgage interest, however, may help push retirees above the standard deduction threshold and allow for itemizing. This plan makes sense if you typically have several other types of deductions each year in addition to mortgage interest.
“There are several factors that should be considered…and it depends on your unique circumstances,” says Myers. This would probably be an option for you, for instance, if you had very high medical bills, capital losses, or other deductions. But, you might not be over the standard deduction amount if your only deduction is mortgage interest, so you wouldn’t gain anything by keeping your mortgage until retirement in terms of tax deductions. ”.
One more caution that should be noted is that mortgages are frequently designed so that, as the loan matures over time, a smaller percentage of the monthly payment goes toward interest. The tax benefits of keeping the loan may be much less valuable depending on how long before retirement the mortgage was established.